Inheritance Tax (IHT) is paid on the value of the estate that is left to heirs when someone dies. Every individual has an IHT-free allowance: if your estate on your death is worth more than this, your heirs will pay IHT at 40% on everything above the allowance.
The amount of IHT-free allowance you have on your death will depend on your circumstances. Known as your NIL RATE BAND, it is made up as follows:
Basic nil rate band, available to everyone, of £325,000 per person
If you have a spouse or civil partner, any unused nil rate band on your death can be transferred to him or her, giving a potential nil rate band of £650,000 on his or her death.
From April 2017, a further slice of nil rate band is available to individuals who own their own home and pass it on death to their direct descendants – ie children or grandchildren. The amount of this Residence Nil Rate Band will be £100,000 per person in the 2017/18 tax year, rising to £175,000 per person by April 2020.
The Residence Nil Rate Band can also be transferred, if unused, to a surviving spouse or civil partner.
Inheritance Tax is something that can be mitigated with careful planning. There are a range of measures you can take to minimise your potential liability. Your Almary Green adviser can help you consider these, looking at areas including:
Is your property jointly owned – if so has the ownership been set up to ensure both you and your spouse/co-owner can use your nil rate band effectively?
Are you making the most of your annual IHT-exempt gift allowances?
Can you use trusts to ringfence assets so they are not taken into account when IHT is due?
Would a life assurance policy in trust that pays out on your death to cover IHT work for you?
Could you use schemes that take advantage of Business Property Relief?
Would AIM ISAs provide a suitable solution for your IHT Planning?
Making gifts to friends and family members can be a good way to reduce your future IHT liabilities. However, gifts aren’t counted as fully outside your estate until 7 years have passed after making the gift.
There are a number of gift exemptions which you can use without incurring a possible future IHT liability, as follows:
Annual Gift Allowances:
First £3,000 of gifts in any Tax Year are exempt Any unused portion of that exemption may be carried forward for one year only to use in the following tax year (but the current year’s exemption must be used first)
Outright gifts of up to £250 per annum to any number of persons are exempt
Gifts to Charities and Political Parties are wholly exempt
Gifts to either party to a marriage can be exempt, as follows:
£5,000 from a parent
£2,500 from a grandparent
£1,000 from any person
Regular Gifts Out of Income:
If you have surplus income on a regular basis you can take advantage of a special exemption that lets you set up a regular pattern of IHT-exempt gifts in addition to your other gift allowances. Gifts must come from excess earned income so not from assets or gains from investments and you must be able to show that a pattern has been established. It’s important, therefore, to keep good records of the gifts that you make.
The tax treatment of investments depends on individual circumstances and is subject to change.